Facebook Users Should Expect Changes After IPO

Facebook hopes to raise more than $100 billion tomorrow in a monumental initial public stock offering. The news buzz has mostly focused on Mark Zuckerburg and America's new class of billionaires, but many wonder what going public will mean for Facebook's 900 million users. In his latest piece on slate.com, tech columnist Farhad Manjoo warns users to expect more ads, lots more ads. Zuckerburg, he wrote, will carefully need to balance the whims of advertisers against the desires of users, or risk losing them both.

If you're active on Facebook, what do you expect to change tomorrow? Give us a call: 800-989-8255. Email us: talk@npr.org. And you can join the conversation on our website. That's at npr.org, click on TALK OF THE NATION. Slate columnist Farhad Manjoo joins us from a studio at Stanford. Nice to have you back at the program.

FARHAD MANJOO: Hi. Good to be here.

CONAN: And it was interesting - when they announced the public offering, Mark Zuckerburg said we never even expected that Facebook would be a company. Our real purpose isn't even to make money.

MANJOO: Yeah. That's sort of the tone that a lot of tech CEOs take these days, which is, you know, they're trying to build companies for the public good instead of to make a lot of money. I mean, I think I believe it in Mark Zuckerburg's case. He wasn't expecting to make a lot of money from this when he first started it. He thought he was kind of creating something cool. But obviously, you know, with tomorrow's IPO, it's going to have to be a monster moneymaker.

CONAN: Yeah, he's going to have to take those hundreds of billions and then put them somewhere.

MANJOO: Yeah. I mean, so - and this is kind of the double-edged sword for Facebook. You know, they get a lot of money from investors, but those investors are going to expect kind of big returns. That's why they're putting money in at such a high valuation. And the only way - I mean, the way that Facebook makes money right now is by running ads on the site, getting money from companies to run ads on the site. But, you know, I bet that most of your listeners have not clicked on a single Facebook ad, because they get sort of very low clock-through rates, even compared to other ads on the Web.

And so this is the challenge for Facebook. They have to figure out a way to advertise, to get a lot of money for ads, to get more money for the ads they run on the site. And the way they're going to do that is by, you know, making the ads more intrusive in some sense, making it a bigger part of the site, not off to the side but as part of the central part of, you know, the place you read on Facebook.

CONAN: For one thing, you noted that they recently sold the exit page.

MANJOO: Yeah. So, you know, when you log out of Facebook now, there's a huge ad. The one that I saw yesterday when I logged out was for Samsung, and that ad sells for something like $700,000 a day.

CONAN: And because Facebook is so pervasive, it really can't increase its audience all that much more. The 900 million are about the ceiling. So you've argued they have to figure out a way if they're going to keep their investors happy to get more out of each one of those people.

MANJOO: Right, right. So this is - it's sort of a, you know, it's a basic math problem for Facebook. They're running out of people on the planet to get on the site, and so what they have to do is get essentially more money from each of those people. Now, they don't get money from us, from the users directly, but they get money from the companies that want to advertise to us. Right now, on average for this year, Facebook is expected to make about - just about $5 per user. And at the valuation that investors are putting on them, they're going to have to sort of increase that every year for the next 10 years at a regular pace, or else, you know, or else their stock price will fall.

CONAN: But those are not just necessarily banner ads which are of limited use anyway.

MANJOO: Yeah. I mean, the way - Facebook has this idea that they can make ads that people won't hate, and the way they do that...

(SOUNDBITE OF LAUGHTER)

MANJOO: Yeah, I know, it sounds funny. The way, you know, the way they hope to do that is they want to serve you ads that are kind of based on stuff you've liked on Facebook in the past. So if you - the example they've been touting is one - a test they ran with Ben & Jerry's. So if you have previously clicked like on the Ben & Jerry's page or the brand anywhere, you are, you know, a follower of Ben & Jerry's on Facebook. Now, Ben & Jerry's site - their Facebook page posts updates about their ice cream all the time. And last year, Facebook unveiled the program called the reach generator. So this allowed Ben & Jerry's to pay Facebook to allow those posts to go directly into your news feed. So it's an ad, and it reached 98 percent of the people who liked Ben & Jerry's page.

And according to Ben & Jerry's, the ad did really well. People - because of that ad, they say, people went out and bought ice cream in the middle of the winter and so, you know, the ad proved to be worth it for Ben & Jerry's. Now, Ben & Jerry's is a company that lots of people love. It's hard to hate ice cream. You know, I wonder and lots of other people wonder how well that will do for many companies that many not be as friendly...

CONAN: As crunchy as Ben & Jerry's, yeah.

MANJOO: Right, right.

CONAN: Hopeful for Chevrolet, for example.

MANJOO: Right. Yeah, exactly. This week GM - it was revealed that GM decided that it's not running ads on Facebook because they didn't prove to be a good investment.

CONAN: So give us an idea. There is a paradigm here. Google, a company not unlike - there's nothing quite - like but not unlike Facebook, went public some time ago. It, too, said it wasn't in the business to make money, but how is it changed?

MANJOO: So with - I mean, at the time that Google went public, it had already found this kind of killer way to make money, the - which is ads they run along besides search. And their idea was, you know, and so at the time, they could sort of confidently declare that they're going to not - they're going to sort of be an unconventional kind of company because they were making a ton of money, you know, sort of per user a lot more than Facebook is now. And their kind of growth expectations were - seemed to be more clear.

But, you know, we seen over time, even though they had these very sunny prospects - and Google is a fantastically, you know, successful company - they've done really well. But they, too, have had to sort of bend to pressure from investors and try to go off into new markets that you wouldn't have expected to at first. So, you know, now they're doing a social network in order to compete with Facebook. They bought Motorola, a phone company last year. They're making, you know, hardware, which is something that people didn't expect, but they have to do it because they have to compete with Apple.

And so this, you know, once you go public, once you sort of are beholden to investors, companies have to do a lot of things that, I think, they don't expect to do at the start, and they might not like to do. And so, I think, this is what we might see at Facebook. You know, so far they've had - they've been able to keep advertisers relatively far away from the users. I mean, they make enough money as a company that they can sort of call the shots. But over time, as investors kind of demand more, I think the advertisers could, you know, win out in some ways over what we want as users.

CONAN: We're talking with Farhad Manjoo about what will change when Facebook goes public tomorrow. He's the technology writer for Slate magazine and Slate.com. 800-989-8255. Email us: talk@npr.org. Mike's on the line, calling from Cincinnati.

MIKE: Hey, I'm just curious why wouldn't think - wouldn't people think that Facebook is going to continue gaining users when, you know, people continue having kids and every single year, you know, a new generation, a new line of people that are too young for Facebook to sign up?

CONAN: Why is the universe limited for Facebook, Farhad?

MANJOO: Well, I mean, they've, you know, people die too. They're signing up. They're basically signing up. Everyone, you know, most Western countries, the penetration - their user penetration is basically kind of growing with the population. It saturates...

MIKE: Exactly. People die, but there's older people who have - that have Facebook. You know, they're fewer and far between. (Unintelligible)...

CONAN: Oh, you'd be surprise. Their demographic is not quite what you think it is.

MANJOO: I mean, they, you know, they're big growth opportunity, the place they see - the places they see as being kind of the next frontier for them, are places in the developing world, places where people don't have much Internet access right now. But over time, they're going to get a lot of mobile devices that are going to give them access to the Internet. And so that's where Facebook sees a lot of people coming in over time. The problem sort of - the money problem there for them is that, you know, those people - the reason they don't have Internet access now is because they don't have very much money, they don't have much infrastructure there, and that they might not be a very compelling demographic to advertisers.

CONAN: They may not buy a lot of Ben & Jerry's, yeah.

MANJOO: Right. Exactly.

CONAN: Yeah.

MIKE: But the way the tech industry is - I mean, that's only going to keep going up though. I mean, you know, what I mean? Like people are just going to continue to - yeah, it's just going to continue to go up until it, you know, I'd like the future of humanity is, you know, at - and there's no...

MANJOO: Well, you know, they hope to get everyone on the planet on Facebook, but the number of people on the planet is finite.

CONAN: Mike, thanks...

MIKE: Yeah, that's true, but, you know, we hit 7 billion last year so, you know, who says we're going to stop having kids?

CONAN: Mike, thanks very much for the call. I suspect you're probably right about that, which raises a question, though, Farhad. If investors may force Facebook to do some things it really doesn't want to do or at least might not want to do, why does it need to go public at all?

MANJOO: That's a good question. I think that, you know, I think that Mark Zuckerberg and other people who run Facebook have not been especially keen to go public. I mean, they waited eight years to go public. The basic - the sort of the - the fundamental reason they went public is because the SEC basically forced them to. They have a lot of, you know, a lot of employees have shares in Facebook. People were starting to sell it to outsiders, and there's an SEC rule that says, that if more than a certain number of people have interest in a company, it has to go public.

And also, you know, the - one of the ways that Facebook has been able to attract the top engineers and top employees in Silicon Valley is by offering them stock options. And the idea was that at some point, those stock options would be worth a lot of money. If they didn't go public, it would've been, you know, harder to kind of promise all those - all that money to all those really smart people.

CONAN: Farhad Manjoo is with us, technology writer for Slate.com. You're listening to TALK OF THE NATION from NPR News. An email from Shannon(ph) in St. Louis: As a social media manager who creates and manages Facebook ads on a regular basis, I don't anticipate Facebook's IPO to affect my job or even my career long-term as somebody who works with Facebook. Less than 50 percent of people might click on any given ad because of how irrelevant they may be. But as long as Facebook remains relevant in the social and business world, advertisers will continue to use ads to build their fan base. With such specific demographic targeting tools, how could you not use Facebook? And, I guess, that's why it's going to be worth $100 billion tomorrow.

MANJOO: Right. I mean, I don't think there's anybody saying that people - that advertisers are going to stop using Facebook. The thing, though, is that, in order for Facebook to kind of make good on evaluation that it's going to get on the stock market, it has to grow its revenues by 25 percent a year, at least, you know, by a huge amount. And so it's, I mean, I think most people expect Facebook to, you know, attract a lot of advertisers to be kind of a good platform for advertising. The question is whether it'll be sort of a fantastic sort of something unprecedentedly good platform. And I think that's, you know, that's what it has to do, and it's unclear if it's going to be able to do that.

CONAN: Let's go next to Patrick. Patrick, a caller from St. Louis.

PATRICK: Hello. Hi. And thanks for the show, and thanks for taking the call.

CONAN: Sure.

PATRICK: Farhad, I had a question for you. What do you feel like - what's your opinion on how Mark Zuckerberg is going to be as the CEO of a public company, meaning finally having someone to answer to and having to - having his responsibility be driving share price instead of growing the company?

MANJOO: Yeah, I mean, I think this will be one of the most interesting things to watch. I think, you know, a lot of people in Silicon Valley agree that Mark Zuckerberg has kind of been unexpectedly good as a business leader. I think people, you know, in - early in his career, kind of wrote him off, and he has been, you know, grown this company in the way that people - nobody kind of expected. And one of the ways he's done that is by kind of calling the shots completely, especially when it came to the product, what Facebook would look like and the new features that it would add.

And, you know, we've seen them do this even when users got upset. You know, several innovations that Facebook has added over time, like the news feed, for example, users didn't immediately like. But Mark Zuckerberg kind of stuck to his guns, and people eventually loved them. So I wonder, you know, the question is whether he'll be, you know, he'll have as much kind of open - as much freedom to do that as a CEO of a public company where investors control the stock price, and that's kind of the daily verdict on how he's doing.

You know, certainly, he has more than majority voting control in the company, so there's no one can kind of get rid of him. But the stock price can affect other things. It can affect kind of employee retention. It can affect Facebook's ability to buy other companies. So it's important. I think, you know, I expect that Mark Zuckerberg isn't going to look at the daily stock prices as a way to determine what he's going to do.

And he sees himself and, I think, others see him as working kind of in the way that other legendary tech CEOs have done, like Bill Gates or Steve Jobs, where, you know, they focus on the product and they focus on kind of their - they have clearly defined goals that they're trying to kind of fulfill. But - so I expect him to act that way, but we'll see. I guess, it's, you know, it's a mystery of what'll happen - what happens to people once they come under that glare.

CONAN: Patrick, thanks very much for the call.

PATRICK: Thank you.

CONAN: So, Farhad, how many shares can we put your down for?

MANJOO: I - I'm not allowed to invest in Facebook because I cover them but...

CONAN: Oh.

MANJOO: You know, I don't know if I would invest in them. It's risky. I have to say, I think it's risky. I'm going to following them closely as a company and, I think, you know, they're a fantastically well-run company. But it's a tech company. Tech companies that are in novel spaces, you just never know what's going to happen. So I wouldn't put any of my own money in them.

CONAN: Farhad Manjoo, thank you very much for your time today.

MANJOO: Sure. Thanks. Good to be here.

CONAN: Farhad Manjoo, tech columnist for Slate magazine. His most recent piece, "What Does Facebook's $100 Billion IPO Mean for You?" There's a link to it at npr.org. Click on TALK OF THE NATION. He joined us from the campus at Stanford University. Tomorrow, TALK OF THE NATION: SCIENCE FRIDAY. Ira Flatow will be here with a look at urban agriculture and the future of food. We'll talk to you again on Monday. Have a great weekend everybody. It's the TALK OF THE NATION from NPR News. I'm Neal Conan in Washington. Transcript provided by NPR, Copyright NPR.